Valuation Insights
Control Premium
Authored by Manish Saxena, assisted by Riddhi Mehta
What is Control Premium?
Assessing the right value of a target company is
one of the most important aspects of any M&A
transaction. The value of target, in addition to
several factors like quality of management,
financial performance and future outlook, also
depends on whether a controlling stake is being
acquired in the target or a minority stake.
Traditionally it has been observed and widely
accepted that an investor, on a per share basis,
would be ready to pay a premium to buy a
controlling stake in the company versus buying a
minority stake.
Summary of items included in this newsletter
Page 1
What is Control Premium?
Page 2
Why do we need to know about Control
Premium?
Page 4
About Grant Thornton
© Grant Thornton India LLP. All rights reserved.
September 2014
This premium is easily observable in transactions
where the target is a listed company. For
example, in a recent transaction, Sun Pharma
bought Ranbaxy for an implied value of approx.
INR 455 per share which was at a premium of
approx. 20% to Ranbaxy's market price. In
another transaction, Baring Private Equity Asia
bought a controlling stake in Hexaware
Technologies Ltd. for INR 135 per share,
reflecting a premium of approx. 12% over its
pre-acquisition market price. This premium, as
observed in the aforementioned transactions, is
often referred to as “control premium” or
“acquisition premium”.
Page 2
What drives Control Premium?
Page 3
Empirical analysis of transactions
involving Controlling Stake
Page 6
Contact us
What drives Control Premium?
The acquirer pays a premium for a controlling
stake because, unlike a minority stake, the
acquirer can generate incremental value from
the target by exercising prerogatives of control
like ability to change the management, take
better decisions for the company, change the
capital structure to a more optimal level, etc.
Further in case of strategic acquisitions, the
acquirer, in addition to aforementioned benefits
of control, could also generate incremental value
through synergies derived from the target.
In case of the Baring-Hexaware transaction,
Baring being a financial investor would have
mainly expected to generate operational
improvements by virtue of control, though it
could have also generated revenue synergies for
Hexaware from its portfolio. While in case of
the Sun Pharma-Ranbaxy transaction, Sun
Pharma mainly expected to generate significant
synergies in the form of gaining a leadership
position in the branded generics market, cross
selling their products, operational synergies
from procurement and supply chain efficiencies
and also reducing the compliance costs by
substituting Ranbaxy‟s FDA affected products
with its own products.
Why do we need to know about Control
Premium?
Though the premiums paid in transactions vary
significantly, an empirical analysis of the
historical premiums in the control transactions
can be useful for the acquirer and seller in
negotiations. It can also be useful for
shareholders of the target in evaluating whether
the shares should be tendered in an offer made
by the acquirer.
Further, if there are several potential acquirers
who are able to generate the aforementioned
incremental value from the target, the existing
shareholders of the target would have a better
bargaining power to realise a larger share of this
incremental value. Hence, the quantum of
control premium being shared with the existing
shareholders is dependent not only on the
quantum of incremental value an acquirer
expects to generate from the target, but also on
the nature and number of potential acquirers.
Since these factors vary significantly for each
target, one can observe a wide range of
premiums being paid in acquisitions ranging
from nil to as high as 100%.
Very often in consummation of a deal,
Control Premium plays a critical role. The
right price determination is generally based
on the perceived benefit of the acquirer in
owning and managing the company his way.
Darshana Kadakia
Partner, Grant Thornton India LLP
Further, the control premium can become an
important input for valuation of privately held
companies for non-transaction related purposes
e.g. for litigation, regulatory purposes, financial
reporting, etc. In these valuations, where there is
no willing buyer or a willing seller involved, the
control premium data derived empirically could
become a very important input in estimating the
right value of the business being valued.
2
An empirical analysis of a transaction
involving Controlling Stake.
For the empirical analysis, approximately 90 mid
to large transactions carried out in India during
the last 10 years involving acquisition of
controlling stake in listed targets were identified.
The 1 month and 1 week control premium was
then calculated for each target by comparing the
offer/acquisition price with the market price
prevailing 1 month and 1 week prior to the
announcement of the acquisition.
As per the chart below, the average 1 month
and 1 week control premium paid in these
transactions was estimated as 34.2% and 27.0%
respectively; while the median control premium
was approx. 26.2% and 22.0% respectively.
Control Premium
40.0
34.2
35.0
30.0 27.0
26.2
Percentage
Since the average premium could be influenced
by a few outlier transactions, a median was
considered as a better measure.
Further, 1 month median control premium was
considered as a better measure as 1 week market
prices before the transactions could have been
influenced by leakage of information on the
transaction. Accordingly, based on the median 1
month control premium, the premiums paid in
control transactions in India could be broadly
considered to be approximately 26%.
An analysis of control premiums across various
industries indicates that the control premiums
have been lowest in the IT industry while being
the highest in the healthcare industry. The
higher premiums observed in healthcare,
industrial and materials industries could be on
account of scarcity of good assets and also due
to involvement of foreign acquirers expecting to
generate significant synergies from Indian
targets.
Though it is difficult to generalise based on the

25.0 22.0 lower number of transactions involving listed IT

20.0 sector companies, the lower premiums observed
15.0 in the IT sector might indicate that there are not
too many acquirers trying to derive synergistic
10.0
benefits from Indian IT companies. On the
5.0 contrary, India IT companies have been
0.0 acquiring smaller and niche targets outside
1 Week Prior 1 Month Prior India.
Average Median

1 Month Control Premium (Median)

47.5 47.6
41.9

25.5 26.8
22.1
15.1

Consumer Consumer Financials Healthcare Industrials IT (13) Materials

Discretionary Staples (6) (12) (6) (13) (19)
(12)

3
In a nutshell
To conclude, despite variance across various
industries, significant control premiums, with a
median of approximately 26%, have been paid
historically to buy controlling stake in Indian
companies. However, this figure should be
considered only as a reference or staring point.
The appropriate premium for any target over
the prevailing market price or the pre-
acquisition value of the target, should be
evaluated based on the industry in which the
target operates, an analysis of the incremental
value that can be generated from the target by
exercising control, the number and nature of
potential acquires for the target and the kind of
synergies potential acquirers can generate.

About Grant Thornton International

Grant Thornton is one of the world‟s leading organisations of independent assurance, tax and advisory
firms. These firms help dynamic organisations unlock their potential for growth by providing
meaningful, forward looking advice. Proactive teams, led by approachable partners in these firms, use
insights, experience and instinct to understand complex issues for privately owned, publicly listed and
public sector clients and help them to find solutions. More than 38,500 Grant Thornton people, across
over 130 countries, are focused on making a difference to clients, colleagues and the communities in
which we live and work.

About Grant Thornton India LLP

Grant Thornton India LLP is a leading professional services firm providing assurance, tax and advisory
services to dynamic Indian businesses. “The firm‟s mission is to be the adviser of choice to dynamic
Indian businesses with global ambitions.”

With a partner-led approach and sound technical expertise, the Firm has extensive experience across
many industries and businesses of various sizes. We provide focused practice groups in a range of
industries, sectors and market segments. We have extensive experience in valuation, providing end to
end compliance and advisory solutions to several prominent players.

Moreover, with our robust compliance solutions and ability to navigate complexities we help dynamic
organisations unlock their potential for growth through global expansion, global capital or global
acquisitions. With over 2000 people, the Firm is recognised as one of the largest accountancy and
advisory firms in India with offices in New Delhi, Ahmedabad, Bengaluru, Chandigarh, Chennai,
Gurgaon, Hyderabad, Kolkata, Kochi, Mumbai, Noida and Pune, and affiliate arrangements in most of
the major towns and cities across the country.

We provide meaningful, actionable advice, every step of the way.

About our Valuation Services

Valuation services are required in acquisitions, investments, disposals, buyouts, mergers, restructuring,
fair value accounting, statutory/ legal reporting. Grant Thornton's Valuations team has significant
experience in providing valuation advice to corporates, funds and institutions for their entire range of
requirements. Working as a cohesive global team, our Valuation specialists share ideas, contacts and
sector knowledge to help deliver high quality advice to clients.

Following are some of the specialist valuation services that we provide:

• Business valuation • Valuation of Intangibles • Private Equity Valuation
• Valuation for Financial Reporting Purposes (US GAAP / IFRS /Indian GAAP) 4
About "Valuation Insights" Our offices in India
Valuation Insights" is a periodic newsletter
published by Grant Thornton India LLP, a
member firm within Grant Thornton
International. This publication is our effort to NEW DELHI BENGALURU
National Office “Wings”, 1st Floor
discuss and address various valuation issues Outer Circle 16/1 Cambridge Road
using the best practices and international L 41 Connaught Circus Ulsoor
New Delhi 110 001 Bengaluru 560 008
guidelines. Our team of professionals share their T +91 11 4278 7070 T +91 80 4243 0700
thoughts on the nuances of valuations and its
strategic and practical implications. We hope
that you will find our newsletter informative and
CHANDIGARH CHENNAI
encourage you to look at Grant Thornton as a SCO 17 Arihant Nitco Park, 6th Floor
reliable and valuable solution provider for your 2nd Floor No.90, Dr. Radhakrishnan Salai
Sector 17 E Mylapore
valuation needs. Chandigarh 160 017 Chennai 600 004
T +91 172 4338 000 T +91 44 4294 0000
Disclaimer
The information and opinions contained in this
document have been compiled or arrived at GURGAON HYDERABAD
from published sources believed to be reliable, 21st Floor, DLF Square 7th Floor, Block III
Jacaranda Marg White House
but no representation or warranty is made to DLF Phase II Kundan Bagh, Begumpet
their accuracy, completeness or correctness. Gurgaon 122 002 Hyderabad 500 016
T +91 124 462 8000 T +91 40 6630 8200
This document is for information purposes
only. The information contained in this
document is published for the assistance of the
KOLKATA MUMBAI
recipient but is not to be relied upon as 10C Hungerford Street 16th Floor, Tower II
authoritative or taken in substitution for the 5th Floor Indiabulls Finance Centre
exercise of judgment by any recipient. This Kolkata 700 017 SB Marg, Elphinstone (W)
T +91 33 4050 8000 Mumbai 400 013
document is not intended to be a substitute for T +91 22 6626 2600
professional, technical or legal advice. All
opinions expressed in this document are subject
to change without notice. Whilst due care has
NOIDA PUNE
been taken in the preparation of this document Plot No. 19A, 7th Floor 401 Century Arcade
and information contained herein, Grant Sector – 16A Narangi Baug Road
Noida 201301 Off Boat Club Road
Thornton, does not accept any liability T +91 120 7109001 Pune 411 001
whatsoever, for any direct or consequential loss T +91 20 4105 7000
howsoever arising from any use of this
document or its contents or otherwise arising in
connection herewith.

Our offices

5
Please feel free to get in touch with us for information and assistance for your existing or potential
service needs in Valuation.

Darshana Kadakia David Panna

Partner Partner
Grant Thornton India LLP Grant Thornton India LLP
E: Darshana.Kadakia@in.gt.com E: David.Panna@in.gt.com

Grant Thornton India LLP (formerly Grant Thornton India) is registered with limited liability with identity number AAA-7677
and its registered office at L-41 Connaught Circus, New Delhi, 110001

Grant Thornton India LLP is a member firm within Grant Thornton International Ltd („Grant Thornton International‟).

Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms
independently. For more information or for any queries, write to us at contact@in.gt.com

www.grantthornton.in

© Grant Thornton India LLP. All rights reserved.